FED bought a stunning 61% of all net US government debt issuance in 2011

United States of Weimar:The has FED bought a staggering 61% of all net US government debt issuance in 2011, says a former Treasury official:

Demand for U.S. Debt Is Not Limitless In 2011, the Fed purchased a stunning 61% of Treasury issuance. That can't last.
The conventional wisdom that nearly infinite demand exists for U.S. Treasury debt is flawed and especially dangerous at a time of record U.S. sovereign debt issuance.
The recently released Federal Reserve Flow of Funds report for all of 2011 reveals that Federal Reserve purchases of Treasury debt mask reduced demand for U.S. sovereign obligations. Last year the Fed purchased a stunning 61% of the total net Treasury issuance, up from negligible amounts prior to the 2008 financial crisis. This not only creates the false appearance of limitless demand for U.S. debt but also blunts any sense of urgency to reduce supersized budget deficits.Still, the outdated notion of never-ending buyers for U.S. debt is perpetuated by many. For instance, in recent testimony before the Senate Budget Committee, former Federal Reserve Board Vice Chairman Alan Blinder said, "If you look at the markets, they're practically falling over themselves to lend money to the federal government." Sadly, that's no longer accurate.
It is true that the U.S. government has never been more dependent on financial markets to pay its bills. The net issuance of Treasury securities is now a whopping 8.6% of gross domestic product (GDP) on average per annum—more than double its pre-crisis historical peak. The net issuance of Treasury securities to cover budget deficits has typically been a mere 0.6% to 3.9% of GDP on average for each decade dating back to the 1950s.
But in recent years foreigners and the U.S. private sector have grown less willing to fund the U.S. government. As the nearby chart shows, foreign purchases of U.S. Treasury debt plunged to 1.9% of GDP in 2011 from nearly 6% of GDP in 2009. Similarly, the U.S. private sector—namely banks, mutual funds, corporations and individuals—have reduced their purchases of U.S. government debt to a scant 0.9% of GDP in 2011 from a peak of more than 6% in 2009.
The Fed is in effect subsidizing U.S. government spending and borrowing via expansion of its balance sheet and massive purchases of Treasury bonds. This keeps Treasury interest rates abnormally low, camouflaging the true size of the budget deficit. Similarly, the Fed is providing preferential credit to the U.S. government and covering a rapidly widening gap between Treasury's need to borrow and a more limited willingness among market participants to supply Treasury with credit.The failure by officials to normalize conditions in the U.S. Treasury market and curtail ballooning deficits puts the U.S. economy and markets at risk for a sharp correction. Lessons from the recent European sovereign-debt crisis and past emerging-market financial crises illustrate how it is often the asynchronous adjustment between budget borrowing requirements and the market's appetite to fund deficits that triggers a shock or crisis. In other words, budget deficits often take years to build or reduce, while financial markets react rapidly and often unexpectedly to deficit spending and debt.
Decisive steps must be implemented to restore the economy and markets to a sustainable path. First, the Fed must stabilize and purposefully reduce the size of its balance sheet, weaning Treasury from subsidized spending and borrowing. Second, the government should be prepared to lure natural buyers of Treasury debt back into the market with realistic interest rates.
If this happens, the resulting higher deficit may at last force the government to make deficit and entitlement reduction a priority. First and foremost, however, we must abandon the conventional wisdom that market demand for U.S. Treasury debt is limitless.

Mr. Goodman is president of the Center for Financial Stability and previously served at the U.S. Treasury.

I'd wager that if there were not so much shrouded behind a veil of secrecy, we'd find the Fed bought ALL of it.

“If ye love wealth greater than liberty, the tranquility of servitude greater than the animating contest for freedom, go home from us in peace. We seek not your counsel, nor your arms. Crouch down and lick the hand that feeds you; May your chains set lightly upon you, and may posterity forget that ye were our countrymen.”

I think when its common knowledge that only the FED is buying the debt you will start to see the $$ drop like a rock. The FED will have to choose to save the $$ or keep its ZIRP. This may happen by the end of the year IMHO. And by then it may be too late.

Next step would be to seize 401k accounts and replace them with treasuries call it eminent domain to get around the courts, which is when land or other property is seized “for the greater good.”

I think when its common knowledge that only the FED is buying the debt you will start to see the $$ drop like a rock. The FED will have to choose to save the $$ or keep its ZIRP. This may happen by the end of the year IMHO. And by then it may be too late.

Next step would be to seize 401k accounts and replace them with treasuries call it eminent domain to get around the courts, which is when land or other property is seized “for the greater good.”

That's what they would like to do, but it's unlikely that the vast majority of those who are now becoming aware of this will allow them to continue much longer.

Remember, they don't know the future better than anyone else and the more transparency there is the faster they fail.

Paradigm shift in 10, 9, 8, .....

Ron Paul: He irritates more idiots in fewer words than any American politician ever.

These things can happen quick and suddenly, when it breaks. And look so serine beforehand.

Even if it is common knowledge, people can stay complacent because others are not acting. If all my money is in bonds right now (and many are forced to be in them) I would be very close to the exit. Look for others to act is typically a wait and see.

What you need is a catalyst that will spook the people "in the know" out of the positions. This is when the mad rush to exit will happen, then everybody will be "in the know". It will get bloody, very bloody in the bond market when everybody is trying to exit at the same time thru a hole the size of a dog door while the house is burning. (apt use of metaphors, LOL)

After three years of relative stability in the corner offices of corporate America, 2012 is shaping up as a year of CEO musical chairs. That’s because a wave of executives are looking to step down, cash in their stock options as stocks rise and avoid new government regulations that many see as too challenging and stressful.

Yet, all of this managerial turbulence could shape up to be a blessing in disguise for job seekers and mid-and-lower level workers, corporate governance experts say. Executive changes often spur a domino effect of jobs opening up at multiple levels of the company after many CEO’s decide to bring in new players, said Mark Madden, Senior VP of Executive Search with B.E. Smith, one of the nation’s largest health care C-suite recruiters.

In particular, the revolving door is spinning faster among health care and financial services executives, who are jumping ship, retiring, or being forced out at a quicker clip than their counterparts in other industries. Last month, 25 health care CEOs and 13 financial services CEOs departed, making those sectors the two biggest culprits of the rising turnover tide.

A growing push from the federal government to police the financial services industry and clamp down on executive compensation is prompting the exodus of CEOs in the financial services industry, said Don Hambrick, a professor at Penn State’s Smeal School of Business who consults for financial services firms. This includes Dodd-Frank, the new Consumer Financial Protection Bureau. In the aftermath of the financial crisis, many financial chief executives reasoned that lending and business volume would return to normal once the crisis abated. “But by this point, the guys I speak with are beaten down…so with compensation on a tight leash, instead of slogging along in an industry whose best days are behind them, many are just deciding to play golf now, and sit on a board or two,” he said.

Hospital executives, too, are increasingly stepping down and moving into contract consulting work as President Obama’s signature health care law’s provisions start taking effect. “We’re seeing a growing number of executives kind of throw up their arms and say, ‘I’ve gone through major changes in health care, and I’m not really in a position where I want to go through this major change again,” Madden said.

At the same time, corporate boards are looking increasingly for new blood to steer companies past crisis mode – and their current CEOs can take a hint. Until now, boards in virtually all industries have avoided shuffling their executives, while executives themselves who might have otherwise wanted to retire or switch jobs held off either out of allegiance to seeing the company through a rough patch or fear that life at another company could be worse, said Matt McGreal, a principal at Crist|Kolder Associates, a CEO search firm.

“The devil you know is often better than the one you don’t. Your company may be in a bad situation, but the one you’re going to may be even worse, was how many executives were thinking,” McGreal said. “But those fears are starting to dissipate, and there’s definitely going to be greater volatility with top executives coming and going in the coming months.”

The number of CEOS who left their posts in January spiked by 48 percent over December, rising to 123 – the highest level since May 2010 according to data from outplacement service firm Challenger, Gray & Christmas. Fifty-one percent resigned or stepped down, 26 percent retired, and only 9 percent left to take other jobs. Last month’s high-profile CEO resignations include Wayne Gattinella, WebMD, who stepped down after the healthcare information services provider slashed its revenue outlook twice during 2011, and Fannie Mae's Michael Williams, who is stepping down amid increasing criticism for helping spur the housing market collapse and collecting billions in taxpayer bailout funds.

While changes at the top may unnerve some employees, rarely do CEO switches bring about mass terminations of existing employees, he said. Instead, CEO churning often translates into strategy changes “which often creates some real opportunities for people lower down the food chain to be promoted in the new order of things,” McGreal said.

Ron Paul: He irritates more idiots in fewer words than any American politician ever.

Fed Is Buying 61 Percent of U.S. Government Debt

Fed Is Buying 61 Percent of U.S. Government Debt Written by Bob Adelmann
Thursday, 29 March 2012

In his attempt to explode the myth that there is unlimited demand for U.S. government debt, former Treasury official Lawrence Goodman explained that there is high perceived demand because the Federal Reserve is doing most of the buying.

Runaway government debts have triggered uncontrolled money printing that in turn will lead to inflation that will decimate portfolios, according to the latest forecast from "Dr. Doom" Marc Faber.

Dr. Marc Faber
Axel Griesch | ASFM | Getty Images
Dr. Marc Faber
Investors, particularly those in the "well-to-do" category, could lose about half their total wealth in the next few years as the consequences pile up from global government debt problems, Faber, the author of the Gloom Boom & Doom Report, said on CNBC.

Efforts to stem the debt problems have seen the Federal Reserve [cnbc explains] expand its balance sheet to nearly $3 trillion and other central banks implement aggressive liquidity programs as well, which Faber sees producing devastating inflation [cnbc explains] as well as other consequences.

"Somewhere down the line we will have a massive wealth destruction that usually happens either through very high inflation or through social unrest or through war or credit market collapse," he said. "Maybe all of it will happen, but at different times."

Ron Paul: He irritates more idiots in fewer words than any American politician ever.

This isn't surprising, it's what many of us have been saying for a while now. It won't be long before no one wants any part of U.S. debt and the Fed will have to monetize all of it. The Fed is crushing the upward pressure on interest rates for now.

We still have the advantage of having our guns and drone missiles pointed at the oil exporting countries in case they think about trying to trade their oil in some other medium of exchange. Having oil sold in dollars creates a minimum demand around the world for dollars, which is the only thing keeping us from double digit inflation right now. We just export it.

At some point even our guns won't be able to scare them into taking our dollars. When will that be? I have no idea.

61% will very quickly snowball into 65...then 75...and so on. The printing presses will be run at ever increasing speeds as foreigners flee the "safety" of US debt, which in turn will force the presses to reach even faster speeds.

How long can they keep it all from falling apart? What will be the end result?

I have read countless opinions and predictions from many people, and if even 1/10th are even close, we are in for one hell of a nightmare.

61% will very quickly snowball into 65...then 75...and so on. The printing presses will be run at ever increasing speeds as foreigners flee the "safety" of US debt, which in turn will force the presses to reach even faster speeds.

How long can they keep it all from falling apart? What will be the end result?

I have read countless opinions and predictions from many people, and if even 1/10th are even close, we are in for one hell of a nightmare.

They will stop when inflation hits 20% - tossing the nation into a huge recession.

There is no avoiding a whole lot of pain for the country in the mid-near future.

How long can they keep it all from falling apart? What will be the end result?

Thats the 64 Trillion dollar question. How long do we have??!! Nobody knows. But us Austrians correctly predicted the stock and housing bubbles but it has been difficult to determine timing. All we can say is that it WILL happen.

The one thing that you can count on is that it will be VERY VERY quick. There will not be alot of time to exit positions.

61% will very quickly snowball into 65...then 75...and so on. The printing presses will be run at ever increasing speeds as foreigners flee the "safety" of US debt, which in turn will force the presses to reach even faster speeds.

To be fair, on the graph, it shows private-sector lending increasing and Fed-lending decreasing sharply. But I agree.

To be fair, on the graph, it shows private-sector lending increasing and Fed-lending decreasing sharply. But I agree.

I'd wager that if there were not so much shrouded behind a veil of secrecy, we'd find the Fed bought ALL of it.

The above poster is correct the FED uses surrogates to buy the debt directly. A good portion of the private buyers (surrogates) then turn around and quickly sell to the FED. How much is hard to tell because of the lack of transparency in the process.

With the negative "real rates".. Who (private investors) would logically pay the US to lend them debt for 10 years? very limited people would do that outside of sovereigns for currency manipulations.

The Fed ended their major Treasury buying in June. Right now they are taking revenues from maturing Treasuries (mostly short term) and using that money to purchase longer term ones (basically swapping short term notes for long term notes). According to their latest balance sheet of March 28th, their holdings increased $216 billion compared to one year earlier but one should remember that this includes three months of their purchasing period. During QE2 they picked up $600 billion and the $200 billion is part of that. Compared to the previous week their holdings of Treasury securities only went up $220 million (not even $1 billion). http://www.federalreserve.gov/releases/h41/current/

In June of 2011, when this action ended (it began in November 2010), the Fed had $1.602 worth of US Treasuries (US debt) http://www.reuters.com/article/2011/...75M1QZ20110623 and since today it is $1.667 so in the last nine months they only aqquired $65 billion net new US Treasuries. so they are no longer significant buyers of US debt. It should also be noted that when a security matures for them, they not only get what they paid to buy it but also the interest due which gives them a bit more money to buy a replacement with- hence the $65 billion figure. At the end of the year, the Fed returns their profits from all investments and holdings and operations to the US Treasury minus their expenses.

Primary dealers serve as trading counterparties of the New York Fed in its implementation of monetary policy. This role includes the obligations to: (i) participate consistently in open market operations to carry out U.S. monetary policy pursuant to the direction of the Federal Open Market Committee (FOMC); and (ii) provide the New York Fed's trading desk with market information and analysis helpful in the formulation and implementation of monetary policy. Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.

1. The FED does NOT actually return their profits to the treasury, they just book them in the Treasury's account at the FED. There is no actual flow of funds it's just an accounting operation. The Treasury just gets a claim against the FED. It's basicly like an uncollected tax revenue.

2. The maturity expansion of the FED's treasury portfolio (aka "Operation Twist") led to the situation that the FED has been buying 91% of all 20-30 year bonds since the beginning of the program. Thereby they're pushing investors into shorter maturities and keeping long term rates artificially low.
The fact that shorter dated treasuries didn't collapse so far after QE2 has to do with the shortage of "high grade" collateral in money markets. European Bank are struggling to get $ dollar funding (therefore the $ swap lines between central banks). Treasuries are considered to be the primary collateral. This is where demand is coming from. It's not really investment, it's part of the funding problems in the European banking system.

Interesting chart. Haven't seen one like that. No link so I am curious what time period it covers. Just punching in some numbers to try to guess. The chart says that the Fed during this period purchased $177 billion worth of Treasuries (first column) and it indicates that this was 58% of Gross Issuance which would mean $305 billion was the total issuance- less than one fourth of the expected debt for a year. Maybe that is year to date? This would also mean that there was only $55 billion worth of 20- 30 year notes even issued ($50.3 billion purchased at 91% of issuance).

Thank you for finding and sharing it.

1. The FED does NOT actually return their profits to the treasury, they just book them in the Treasury's account at the FED. There is no actual flow of funds it's just an accounting operation. The Treasury just gets a claim against the FED. It's basicly like an uncollected tax revenue.

WASHINGTON — The Federal Reserve said on Tuesday that it contributed $76.9 billion in profits to the Treasury Department last year, slightly less than its record 2010 transfer but much more than in any other previous year.

The Fed is required by law to turn over its profits to the Treasury each year, a highly lucrative byproduct of the central bank’s continuing campaign to stimulate economic growth.

Almost 97 percent of the Fed’s income was generated by interest payments on its investment portfolio, including $2.5 trillion in Treasury securities and mortgage-backed securities, which it has amassed in an effort to decrease borrowing costs for businesses and consumers by reducing long-term interest rates.

Through those purchases, the central bank has become the largest single investor in federal debt and securities issued by the government-owned mortgage finance companies Fannie Mae and Freddie Mac. As a consequence, most of the money flowing into the Fed’s coffers comes from taxpayers.

But Fed officials note that this cycle — payments flowing from Treasury to the Fed and then back to the Treasury — still saves money for taxpayers because those interest payments otherwise would be made to other investors.

“It’s interest that the Treasury didn’t have to pay to the Chinese,” the Fed’s chairman, Ben S. Bernanke, half-jokingly told Congress last year.

I tried to look at the Fed balance sheet to see how much money the Treasury has at the Fed and if I am looking at the correct line http://www.federalreserve.gov/releases/h41/current/ (I am looking at Section #9- "Statement of Condition of Each Federal Reserve Bank" under "deposits" "US Treasury General Account" and it shows as total for all branchs $68 billion while it gave the Treasury $77 billion so to me it would not appear that the money was not merely an accounting report added to the Fed. Last year the also gave the Treasury over $70 billion.

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